Sterling falls 0.5 percent towards $1.28 as Brexit nerves weigh

LONDON, Nov 23 (Reuters) - Sterling fell nearly half a percent towards $1.28 as a slide in oil prices and a sturdy dollar prompted traders to take profits after an overnight rally before a Sunday summit.

Expectations have grown that Britain and European Union officials will agree on a draft text setting out a close post-Brexit relationship on Sunday, bringing relief to companies and investors after months of tense negotiations.

Those hopes sent the pound briefly rallying more than a percent on Thursday though some concerns over Spain’s eleventh-hour objections over Gibraltar and likely UK political opposition in the coming days have deterred investors from buying the pound broadly.

It ended up 0.8 percent in the previous session, scoring its biggest daily rise in 10 days.

But on Friday, it gave up more than half its gains as a broadening weakness in oil prices — various benchmarks were down between 2 to 5 percent — and a rebound in the dollar prompted traders to cut risks ahead of the weekend.

Against a broadly resurgent dollar, the British currency fell 0.5 percent to $1.2802 while it was a tad firmer against the euro at 88.50 pence.

Spain has asked for changes to the withdrawal treaty and its Prime Minister Pedro Sanchez said he will veto the draft deal on Britain’s exit from the EU if no changes are made.

Though the British currency is trading at the lower end of recent trading ranges and remains one of the most undervalued currencies on a trade-weighted basis, investors are wary of buying the pound at these levels on political concerns.

“While the EU appears practically certain to accept it, the same cannot be said for UK lawmakers, as nearly every faction of Parliament – including Labour, Tory Brexiteers, pro-EU moderates, and the DUP – has threatened to vote it down,” said Marios Hadjikyriacos, an analyst at broking firm XM.Com.

Despite a recent drop in short sterling positions, overall bets remain large at $3.8 billion. (Reporting by Saikat Chatterjee; editing by Jason Neely and Toby Davis)